Choosing the Legal Structure of A Practice

Choosing the Legal Structure of A Practice

Know The Rules

This is a guest post by Iris Kimberg, MS PT OTR

There are many forms that a private practice or therapy business entity can take, ranging from a solo practitioner to a corporate practice with shareholders. The legal entity you choose should be determined by the laws of your particular state( that varies tremendously from state to state), and what you want to offer or provide in your entity. Find out the rules and regulations within your state and make sure you conform. The best place to look for information is with the division that issues your professional licenses, usually the State Education Department.Yellow Sign

It is important to remember that you can start your business in one format and later on transfer it into another format with little difficulty. The two broad categories that your business can fall under is either as a corporation or an unincorporated business entity.

  • Sole Proprietorships

The most common way to initially organize a practice is as a sole proprietorship. This is an unincorporated business entity and involves filing a certificate of conducting business at your local county clerk’s office. You can file your sole proprietorship under your own name, or under an assumed name or DBA, which stands for “doing business as.”

Legally and financially, the therapist and the business are one in the same. Your profit from the business is treated as your own income for tax purposes, and you have full control as well as unlimited liability.

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You can get both malpractice and general liability insurance as a sole proprietorship. This is how most private practices start out and end up. You do not necessarily need the assistance of a lawyer to set up a sole proprietorship.

  • Partnerships

When two or more therapists want to open a joint practice, the business entity they form is often a partnership. You share control and profits but also have shared personal liability for all the business debts and expenses. Here it is essential to research the laws of your particular state and follow the existing partnership laws.

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  • Corporations

If you decide that you want to form a corporation, the laws and regulations differ from state to state. Some states, like New York, have a corporate practice act that clearly states that general business corporations (“Inc’s”) are NOT authorized to practice physical or occupational therapy services.

If that is the case, medical professionals can use other allowable types of corporations. One common type is a professional corporation (P.C.) Usually, you have to register a P.C. with both your state education department and the department of state.

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In many states, shareholders of the professional corporation must be licensees of one profession, and the P.C. may only practice that profession. Find out how your state taxes a P.C. many tax it as a corporation, and any profit left in the company would be taxed at the corporate level. In this case you must take all the profits as salary in order to avoid taxation at the corporate level.

Other options that may be available to you include entities such as a Limited Liability Company (LLC), Professional Limited Liability Partnership (PLLP), or a Professional Limited Liability Company (PLLC). The latter two are common vehicles whereby members of certain different professions can offer multi-disciplinary services.

Understanding the rules and regulations will help you build a practice on a sound foundation that complies with both state law and state education department requirements. The legal form that your business takes will impact the tax and operating structures you will have to follow.

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Please note that this article was written for informational purposes only and does not replace consultations with an attorney and an accountant. It should help you be a more informed and active participant in the discussion.

This is a guest post by:

Iris Kimberg, MS PT OTR, CEO of nytherapyguide.com is a private practice consultant and writes frequent articles about issues related to building, growing and selling a therapy practice entity.

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